The Pilbara: adjusting to post-boom realities

High rise buildings now line Karratha’s skyline, a legacy of the mining boom.

By Mark Scott

13 April 2015

“The biggest challenge for Pilbara Cities at the moment is dispelling the myth that it’s become a ghost town and there’s tumbleweeds rolling down the streets…”

IT was February 2011 when the spot price for iron ore surged to an all-time high of almost US$200 per tonne.

Dozens of new mines had popped up across the iron-rich red dirt of WA’s Pilbara region, Australia’s undisputed iron ore heartland; old hands Rio Tinto and BHP Billiton were expanding their already colossal hubs, while new players Fortescue Metals Group, Atlas Iron and BC Iron were making their presence felt in the global market.

The region’s population centres – Karratha, Port Hedland and Newman – were booming.

Rental prices soared as high as $2000 a week amid chronic housing shortages; hundreds of millions of dollars in new infrastructure spending saw cranes dominate the skyline, and the place names once thought of as dusty frontier towns became major destinations for workers from across the country.

Fast forward four years and the outlook had changed considerably. The price of iron ore more than halved as demand slowed in China and supply continued to dramatically increase, slipping below US$55/t in March.

While the big two miners continue to pump more and more iron ore into the already-depressed market, damaging their own balance sheets in the process, the juniors are beginning to feel the bite; share prices have plummeted and cost-cutting drives have been instigated across the board.

In the towns, the shift from the construction phase to operations at projects across the region has produced tangible effects – rental properties fought over at $2000 per week a few years back sit empty with a $450 per week price tag; temporary worker camps on the outskirts of major centres have emptied, and the hospital, school and road overhaul projects are winding down.

Karratha, Hedland and Newman have changed almost beyond recognition from the early 2000s, but questions remain over the sustainability of future growth, and whether the State Government’s ambitious Pilbara Cities vision of population hubs home to 50,000 people will ever be reached.

As Regional Development and Lands minister from 2008 to 2013, Nationals WA leader from 2005 to 2013 and the architect of the Royalties for Regions scheme, Brendon Grylls oversaw much of the boom in the Pilbara.

After claiming the seat of Pilbara at the 2013 WA election Mr Grylls stood down as minister and party leader, looking to spend more time with his family in their new home in Karratha.

As both a resident and the local member, Mr Grylls remains confident in the future of the Pilbara.

“I don’t think you can say that the expansion has passed the Pilbara by, but we now need to deal with lower iron ore prices into the future with sensible, sustainable population growth,” he said.

“For every billion dollars spent on constructing these big expansions, 10 per cent or more is spent every year maintaining them.

“That’s still a pretty big project – they spent $300 billion, so that’s still $30 billion a year…that sounds like there’s still a bit of kick in the Pilbara to me.”

BHP Billiton massively expanded production from its iron ore mines near Newman.

Boom and bust

Rio and BHP have operated mines in the Pilbara since the 1960s, however it was during the mid-2000s, as Chinese demand for steel began to pick up amid its massive construction boom, that the price of iron ore began to soar.

Miners responded by ramping up production – expanding old operations and opening new mines; BHP’s WA iron ore production rose from 58 million tonnes in FY2000-2001 to 89.6mt in FY2005-2006, all the way up to 225mt in FY2013-2014.

Rio followed a similar path and new miners began to appear in the Pilbara – Fortescue most notably, from beginning construction on its first mine in 2006 to producing 104.4mt in FY2013-2014.

The iron ore price took an upwards trajectory from the mid 2000s, when it had plummeted as low as US$28/t in February 2005, until February 2011 when it peaked at more than US$187/t – with only a few bumps along the way as the global financial crisis struck markets worldwide.

Rio Tinto continues to ramp up production at its mines, despite the soft market conditions.

The impact of the iron ore boom on towns in the region was immense. At the 2006 Census, the Shire of Roebourne – encompassing Karratha, Dampier, Roebourne, Port Samson and Wickham – recorded a population of 16,423 and a median weekly household income of $2010. At the 2011 Census its population had jumped to 22,900 and its household income to $2839.

A similar scenario played out across the Pilbara; the Town of Port Hedland’s population jumped by more than 3000 and its median household income increased almost $1000 per week across the period, while the Shire of East Pilbara, dominated by Newman, saw its population almost double.

The low stock of housing in the major towns was unable to handle the population influx and by the early 2010s, three-bedroom houses built in the 1970s were renting for more than $1500 per week in Port Hedland.

As royalties from the mining projects began to flow into state coffers, the WA Nationals saw an opportunity – holding the balance of power after the 2008 State Election, leader Brendon Grylls made his support conditional upon introducing a scheme that would see 25 per cent of royalties from mining and petroleum projects invested in regional WA.

The Liberal Party, led by Colin Barnett, accepted the deal and Royalties for Regions was born.

In its first five years the program poured more than $1 billion into the Pilbara under the State Government’s Pilbara Cities vision.

Unveiled in 2009, the vision aimed to lift the population of Karratha and Port Hedland to 50,000 each through creating affordable housing, improving infrastructure and community facilities, reducing business costs and lifting health and education services.

Combined with vast swathes of funding from mining companies with an eye to their community licence, the period was transformational for the Pilbara – new hospitals, schools, sports stadiums, water parks, roads, bridges and entire housing estates popped up in major towns.

Last year one of the State Government’s main goals for the Pilbara – to turn towns into cities – was officially reached, when the Shire of Roebourne became the City of Karratha, with a permanent population greater than 20,000.

Along with the boom came what Mr Grylls described as the “evil necessity” of fly-in, fly-out work practices. Temporary worker camps sprang up across the region to accommodate construction phase employees, with the property shortage preventing companies from housing workers in towns.

The impact of FIFO practices on mental health is subject to an ongoing WA Parliamentary inquiry after a spate of suicides in the industry across the past three years.

Companies’ apparent preference for FIFO workers also had an impact at a local level in the Pilbara, according to Mr Grylls, with qualified residents often unable to find work.

Mr Grylls said a fully qualified indigenous man living in Karratha with his wife had contacted his office last week after he was told by a mining company he would have to move to Perth and work FIFO back to the region if he wanted a job.

“That was a company saying they would rather prioritise FIFO over somebody who lived locally, even though the cost of moving that person to FIFO would be $70,000 to $100,000 a year,” he said.

“When companies complain about the high cost of doing business in the Pilbara, they might want to look at the fact that they’re prioritising people who work FIFO over people who live residentially and that have already got a house.”

However the boom could not last forever. From February 2011, prices began a slow decline, as production from major expansion projects flooded the market and Chinese economic growth slowed.

The combination of lower prices and the end of the construction phase saw workers laid off at mines across the region and the astronomical growth in the Pilbara finally began to slow.

Some of the blame for the oversupply of iron ore and the resulting price drop has fallen to the big miners; BHP and Rio have both openly admitted their strategy is to continue boosting production, regardless of the impact on the market.

Mr Grylls hit out at the miners, offering thinly veiled warnings against cutting community funding.

“A normal business would not be driving more supply into a soft market…the companies are big enough and ugly enough to do it, and they’ll say all the right things like that’s their strategy and they’re trying to compete with Vale and the like, but it’s an unusual strategy and you don’t see many other businesses doing it,” he said.

“When the talk goes around that ‘we need to make savings’; well, hang on a sec, part of your strategy is what’s driven this change in price. If off the back of that you tell me that you can’t afford the community support anymore, as a policy-maker I’ll start looking at ways of getting that community support in another way.

“The companies would want to be wary of that. The state of WA and the taxpayers are a part-owner in this business because we own the resource in the ground…if you were a part-owner in a business and the manager said let’s drive more supply into a soft market and halve the price, you’d be attending the next board meeting and speaking up.”

Despite his apparent anger with BHP and Rio over the strategy, Mr Grylls was not entirely sympathetic with the junior miners neither.

“Everyone knew they didn’t have the best resources when they started, because BHP and Rio had the best resources, and it was a high-cost time to develop them,” he said.

“Everyone knew they’d be under pressure if the price came back, and that’s what’s happened.

“[But] if this ends up with some of the juniors being gobbled up by bigger companies and instead of having to build the outer harbour in Port Hedland, they can buy more space by buying the companies that have got it, I think there’ll be a few questions asked.”

Pilbara MLA Brendon Grylls.

Looking foward

So where to now for the Pilbara region?

When news broke in February that a Port Hedland house purchased for $1.3 million in 2011 was passed in at auction for $360,000, it was taken as final proof the mining boom was over.

However Mr Grylls said it was a sign that government policy had worked and the property market had finally normalised.

“We were never going to get to 50,000 people with rent costing $2000 a week, unless someone was paying the bill for you,” he said.

“You can rent a four by two house for $800 a week now; it’s still expensive property, but it’s a normal market.”

The new Karratha – where new residents make the move to open small businesses, like the new yoghurt shop Mr Grylls was taking his son to during his interview with The Australian Mining Review – has better prospects for sustainable, “organic”, long-term growth, the Pilbara MP said.

“All of the sentiment about the mining workforce hollowing out doesn’t stand up to the fact that the Karratha school muster increased by approximately 400 kids this year,” Mr Grylls said.

“The biggest challenge for Pilbara Cities at the moment is dispelling the myth that it’s become a ghost town and there’s tumbleweeds rolling down the streets; the new main street has multiple construction projects happening and there’s $280 million being spent on the main street of Karratha in the next three years.

“I think it’s better, and most of the long-term locals that I speak to say that it’s better, and we’re hoping we can continue to grow sensibly into the future.”

Despite the change in the housing market, mining companies remain wedded to FIFO practices and rosters.

Mr Grylls said companies should be transitioning their FIFO workforce to residential, and warned governments would look at policy changes if they did not.

“The bottom line is that the market has changed. It will take the companies a while to reflect that, but companies growth plans are what caused a lot of the problems here; let’s not get away from that,” he said.

“They’ve got some obligations to help fix the wrongs.

“Companies got pretty fast approvals for donga camps and FIFO workforces off the back of their being no other alternatives; they just need to be aware that governments can move just as quickly to change the policy settings to normalise them.”

Looking back, Mr Grylls seems confident in how the government handled the boom – although he admitted much of the time was spent “just keeping up”.

“You may have done a bit more planning in the early 2000s to be able to take advantage of what was on offer from the expansion, but it’s easy to look back in hindsight,” he said.

“Royalties for Regions enabled the Pilbara to look like it participated in a major transformation of the economy.

“The state was able to spend money on the capital city and money across the rest of the regions, and it was able to fund high quality projects for the Pilbara, as it should…[the Pilbara] did generate billions and billions of dollars of wealth for the nation.”

Royalties for Regions pumped more than a $1 billion into infrastructure in the region, including the multi-million dollar Wanangkura Stadium in South Hedland.